Further to our last article in which we discussed our observations from our compliance “health checks” on asset management firms generally, in this article we will highlight some of the more common issues we encounter with hedge fund clients specifically.
|No personal notes from investee company meetings being retained centrally so hard to use to support investment decision rationale. As part of the investment decision making process, analysts/portfolio managers often meet with potential target companies to obtain business updates; and after these meetings they usually write up personal notes. However, we note from our health checks that many firms do not collect these records. These personal meeting notes form an important part of the documentary evidence substantiating investment decisions, so hedge fund managers need to ensure that such records are properly kept.
|Insufficient measures to prevent misuse of material non-public information (MNPI).Portfolio managers sometimes obtain MNPI about listed companies through their frequent contact with management of these companies; but some smaller hedge fund managers in particular sometimes do not keep lists of the meetings and phone calls they attend, or do not review electronic communications around such meetings / interactions, to detect potential misuse of MNPI flags.
|Lack of measures to ensure appropriate use of soft dollars. Some hedge fund managers do not have mechanisms in place to evaluate their use of soft dollars provided to them by brokers. Fund managers owe a fiduciary duty to investors and need to ensure that all benefits generated from client commissions directly assist in their investment decision-making process.
|Insufficient records of corporate professional investors (CPI) assessment. The key investor protection provisions can be waived for CPIs in certain circumstances but the waiver is not automatic and there needs to be a formal assessment of the investor’s corporate structure and investment process (and formal investor consent). Some hedge fund managers however do not keep sufficient records of these CPI assessments before dis-applying these investor protection provisions. Hedge fund managers need to keep an audit trail of the enquiries made and information obtained as part of these CPI assessments.
|Insufficient monitoring of personal trading activities. Some hedge fund managers do not strictly follow their own internal personal trading policies and procedures. For example, the personal account statements are not reviewed regularly by the firm against approved trading activity or to ensure compliance with the mandatory 30 day holding period, and appropriate securities are not always placed on a restricted list. Hedge fund managers need to ensure that personal trading activities are adequately monitored so that irregularities can be detected and handled properly.
If you would like advice on the source of any of the obligations referred to above or to discuss our health check service, please do not hesitate to contact Jane McBride (2825 9213) or Connie Chan (2825 9431). (We are also offering this service at a special discounted rate currently for a limited time.)